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Hello everyone, i really need your help with the question below as i could not understand how did they get prepayment for operating lease.
A company is leasing an asset under a 4 year operating lease.
The initial non-refundable deposit is $1,000 on 1 January of year 1 followed by 4 annual payments in arrears of $1,000 each on 31 December of years 1, 2, 3 and 4.
What is the charge to the statement of profit or loss and any amount to appear in the statement of financial position at the end of year 1 of the lease?here is an answer
Statement of profit or loss $
Operating lease rental ($5000/4 years) 1,250
Statement of financial position
Current assets: Prepayments ($1,000 deposit/4yrs × 3yrs) 750I really dont know how they have calculated the prepayment for that i am so clueless right now.and what if we had an accrual instead of prepayment.
please i would really appreciate it if you help me with this
Thanking you in advance.
i guess i understood the concept.correct me if i am wrong
so the total lease payments are $5000 (($1000 (initial ) + ($1000 * 4))
Annual payment is charged therefore $5000/4 = 1250 to the statement of profit or loss
NOW there are two payments made in one year,first at $1000 of initial non refundable deposit on 1 jan and second one is also $1000 at 31 dec in the same year.
it makes a total of 2000 amount paid in 1 year
now the difference between amount paid is $2000 and amount charged $1250 is $750
which means we already paid our liability in excess hence its a prepayment
if let’s say the amount paid was less than amount charged then it would be accrual as we still yet have to pay the liability for this year
am i right?
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